U.S. Credit Card Issuers Should Consider the Implications of the European Union's Payment Services Directive 2 (PSD2)
The European Union, established by a series of treaties for common defense, migration, and trade, adopted the euro as its standardized currency in January 1999 to simplify money exchange across borders in Europe and to reduce currency risk from European trade. The 19 of the 28 E.U. member nations that adopted the euro comprise the Eurozone (they are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain). Nine nations, including Denmark and the United Kingdom, chose to remain on their sovereign currency and therefore are not considered part of eurozone although they are part of the European Union. Both segments are under the jurisdiction of the European Central Bank (ECB).
The establishment of the euro as a common currency was the first in a series of steps to conjoin European nations into one common trading area. Despite successful unification for protection and commerce, financial services remained a jumble of offerings across countries. Countries like Germany and the United Kingdom with strong central banks presented highly competitive offerings, while other countries had weak foundations, historical distribution barriers, limited inclusion, and varied pricing. A primary objective of the original Payment Services Directive (PSD) was to harmonize consumer financial services and payments across Europe and to foster consistencies. Figure 1 depicts pricing variances for credit card and mortgage products, which illustrate the range for unsecured and secured lending products.
Pricing, and more broadly, payments are barriers that must be resolved before the European market can be considered truly unified. Unsecured credit card products, similar in design due to network requirements by MasterCard and Visa, have broad acceptance and common product features and technology platforms. However, inconsistent banking laws and competition cause retail banking products to vary in cardholder pricing and terms across Europe. For example, the U.K. cardholder typically pays no annual fee; the Slovakian pays €113.9 for the same plastic network-branded product.
The challenge of disparate rates does not end with bank cards. Secured real estate products, which are beyond the scope of the Payment Services Directive, have similar discrepancies. The mortgagee in Finland, which adopted the euro in 1999, enjoys a mortgage rate averaging 1.8%, yet a family seeking a mortgage in Hungary would be burdened with an 8.5% mortgage. The disparities in mortgage rates are not an interest of the European Commission (EC) under PSD, but the parent body of the European Banking Authority (EBA) will likely broaden its reach in years to come.
The domain of the Payment Services Directive is explicitly payments. In 2007 the European Commission enacted the PSD in an effort to regulate the payments industry across Europe. PSD establishes the rights and responsibilities of payment service providers, harmonizes consumer protections, and is explicitly intended to increase payment competition as a way to reduce operating cost.
The original PSD had little relevance to credit card issuers outside the eurozone. The eurocentric nature of the PSD made its requirements of anecdotal interest outside that territory because its scope was limited to the European Economic Area (EEA). In the updated version of PSD known as Payment Services Directive 2 (PSD2), the compliance requirement expanded to include transactions that either originate or terminate in the eurozone, an approach that has been referred to “one leg in and one leg out.” Extending coverage beyond the original footprint potentially hedges coverage gaps that would result should nations withdraw from the European Union. The most notable issue today is the imminent “Brexit,” the termination of the United Kingdom’s participation in the European Union. This event is particularly sensitive because the exit of this powerful, stable country might set a precedent for other nations to reconsider the merits of the union versus the disadvantages of having to lend support to financially less stable nations such as Greece and Spain.
Without regard to the challenges, the effort embodied in the Payment Services Directive is noble and the design considers the evolution of payments. PSD2 advances the thinking of the original vision and will be a steppingstone to a PSD3 when we enter the next decade.
Mercator Advisory Group’s latest research, Payment Services Directive 2: Worldwide Industry Implications, explains how PSD2 pushes the limits of account access, security, and competition.